Tag Archives: xle

Energy ETF XLE Struggles As Crude Oil Looks For A Bottom

The Energy Select Sector SPDR ETF (NYSEARCA: XLE ), which tracks the S&P 500 Energy Select Sector Index (IXE) and is traded in direct correlation with the WTI crude price, is on the rebound after a sell-off in early November on concerns about global crude oversupply, financial turmoil in the eurozone and China, as well as a weakening U.S. economy now that the Federal Reserve has begun hiking interest rates. Investors appear to be reluctant to step in, considering that the crude oil market remains extremely volatile and the Fed rate hike path is ambiguous. Comments and remarks from top OPEC and U.S. Federal Reserve officials usually move crude prices one way or the other. Recent remarks from Federal Reserve Chair Janet Yellen during her testimony in front of the U.S. Congress on February 11, sent the crude price plunging over 8% in just two days, to a 12-year low of $26.05 a barrel, while the yield spread between the 10-year and 2-year U.S. Treasury Notes dipped below 1 percentage point for the first time since early 2008. Investors may have a new worry about the sinking yield spread because falling spreads may indicate worsening economic conditions in the future. Since 1960, each time the yield spread went negative, a recession followed approximately 12 months later. According to Bloomberg , Willem Buiter, Chief Economist at Citigroup, sent out a note to their clients to get ready for a global recession. “The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies, a large increase in the uncertainty about the advanced economies’ outlook (notably for the U.S.) and a tightening in financial conditions everywhere,” said Buiter in his note. Yield Spread and Crude Oil – There is no simple explanation for how crude oil prices, the U.S. dollar, and the bond yields are correlated. The general consensus is that crude oil prices move in inverse correlation with the U.S. dollar, meaning the crude oil prices would fall as the dollar strengthens, and vice versa. According to Business Insider , a 2014 report by Goldman Sachs’ Jeffrey Currie shows that such rationale has broken down in the wake of the American shale revolution. Currie explained that the U.S. net imports of crude oil have reduced significantly since 2008, as U.S. shale production has surged. This has “significantly reduced the correlation between commodities and the U.S. dollar,” said Currie in his report. Click to enlarge Since early 2014, the WTI crude price has shown a direct correlation with the yield spread between the 10-year and 2-year U.S. Treasury Notes, meaning the crude oil prices have been falling as the yield spread narrows. A simple explanation would be that investors have backed off risky assets, including equities and commodities, on fears of a looming economic slowdown, sending yield spreads lower. As the Fed continues its path of aggressive rate hikes, the 10-year and 2-year yield spread will move towards zero, which puts downward pressure on crude prices. Click to enlarge From our technical viewpoint, the 10-year and 2-year yield spread began tumbling from the 1.77 percentage point level when Fed Chair Janet Yellen made comments on July 15, during her semiannual testimony in front of the U.S. House Financial Services Committee, that the Fed was going to raise interest rates between September and December 2015. The 10-year and 2-year yield spread has fallen over 40% since then and is now supported by the lower trendline of a descending wedge chart pattern at 0.99 percentage point, or the 61.8% Fibonacci retracement level. If the trendline support doesn’t hold, the next support will be at 0.86 percentage points. In the event of a 10-year and 2-year yield spread rebound and a descending wedge chart pattern breakout for the price of WTI crude, a bottom could be in for crude oil. It might be a long shot though, as there is a major head resistance for the 10-year and 2-year yield spread at the 1.2 percentage point level, and several top Fed officials are still calling for aggressive rate hikes. Fundamental and Technical Overview – About 42.98% of the holdings in the XLE ETF are the three big cap oil, gas and energy equipment and services companies, Exxon Mobil (NYSE: XOM ), Chevron (NYSE: CVX ) and Schlumberger (NYSE: SLB ), with a combined market cap of over $590 billion, as of February 25. Click to enlarge Technically, the XLE ETF broke through the neckline of the head and shoulders chart pattern at the beginning of the year and overshot the downtrend channel. The XLE plunged to $49.93, but bounced off before retesting the October 2011 low of $49.63. Since then, the XLE has been moving in a bullish ascending triangle chart pattern, with a head resistance at around the $58 level. A breakout event could require the WTI crude oil price to move from the current level to between $35 a barrel and $37.50 a barrel. Exxon Mobil – As of February 24, Exxon Mobil has a weight of 20.18% in XLE. Exxon Mobil Corporation announced revenues and earnings for the fourth quarter 2015 that beat consensus estimates. The company said it expects to cut capital spending by 25 percent in 2016 and suspended its long-standing share buyback program. In early February, Standard & Poor’s threatened to possibly cut Exxon’s credit rating, one of only three corporate holders of a AAA bond rating. Analysts have raised concerns about the lack of information on the details of operating cost reductions and capital spending in Exxon’s earnings announcement. Roger Read, oil analyst at Wells Fargo Securities told CNBC, “How much are you cutting your spending, what are you going to do to maintain the strength of your balance sheet, and where is production going?” “You didn’t really get any of that with this press release,” he said, but noted that Exxon typically delivers that data at its analyst meeting in March. Click to enlarge In our technical viewpoint, XOM decoupled from XLE in early December and has been moving in a symmetrical triangle chart pattern. Shares of Exxon Mobil broke through the 200-day moving average in early February and are now testing the upper trendline resistance of the symmetrical triangle. A reverse head and shoulders chart pattern, with a neckline at the $83 level has emerged. A breakout of the symmetrical triangle could take XOM to the $90 a share level. Chevron – Chevron has a weight of 14.44% in XLE. Chevron reported a fourth quarter 2015 loss, despite Wall Street’s expectations for a profit, citing plunging oil prices that eroded profitability across all its divisions. The bulk of Chevron’s losses came from its divisions that explore for and produce oil and natural gas. Standard & Poor’s also downgraded Chevron Corp. earlier in February. “We’re taking significant action to improve earnings and cash flow in this low price environment,” John Watson, Chevron’s chief executive, said in a press release. To meet its goal of slashing capital spending by 24 percent in 2016, Chevron has reduced headcount, canceled drilling projects and frozen dividend payouts. The company has reiterated that the dividend remains its top priority, which will put more pressure on shares. Click to enlarge From a technical viewpoint, similar to XOM, CVX decoupled from XLE in early December and has been moving in a symmetrical triangle chart pattern. Shares of Chevron are still trading under the major moving averages, which act as head resistances. CVX could pull back to $80 and $77.50 a share, if it fails to break out of the symmetrical triangle. Schlumberger – As of February 24, Schlumberger has a weight of 8.37% in the XLE. Schlumberger reported fourth quarter 2015 earnings that beat expectations with revenues that were in line with analysts. The company faced a continued decline in rig activity, project delays and cancellations and other problems stemming from lower oil prices with no signs of pricing recovery in the short to medium term, it said in its earnings statement. In its press release, Schlumberger announced a new share repurchase program of $10 billion and that it approved a quarterly cash dividend of $0.50 per share. Click to enlarge Technically, shares of Schlumberger are traded along with the XLE ETF. The decoupling of SLB from XLE in early February could be an aberration, meaning SLB could pull back. There are multiple head resistances, including the 200-day moving average, to overcome before the stock can move higher. Conclusions – XLE, the Energy Select Sector SPDR ETF, which tracks the S&P 500 Energy Select Sector Index and traded in direct correlation with the WTI crude price, is on the rebound after a sell-off on concerns about global crude oversupply, financial turmoil in the eurozone and China, as well as a weakening U.S. economy. Since early 2014, the WTI crude price has shown a direct correlation with the yield spread between the 10-year and 2-year U.S. Treasury Notes, meaning the crude oil prices fall as the yield spread narrows. In the event of a 10-year and 2-year yield spread rebound, a bottom could be in for crude oil. The 2-year share performances of the three largest holdings in the XLE ETF, Exxon Mobil, Chevron and Schlumberger are similar to that of XLE. Decoupling of the share performances of Exxon Mobil and Chevron and the XLE ETF started to appear in December. The decoupling of Schlumberger and the XLE shares could be an aberration. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Lipper U.S. Fund Flows: Large Seasonal Outflows

By Tom Roseen During the fund-flows week ended December 16, 2015, investors became somewhat bipolar ahead of the U.S. Federal Reserve’s two-day policy meeting, while oil prices continued to slide to lows not seen since 2009. OPEC’s report showed the cartel’s oil output had risen to its highest level since 2012, perpetuating the global glut in supplies. Also, new applications for U.S. unemployment benefits jumped to their highest levels in five months. At the beginning of the flows week, investors learned of a meltdown in Third Avenue Focused Credit Fund , a high-yield mutual fund; it began blocking investors from making redemptions, weighing heavily on other high-yield offerings as investors began to wonder if the related selloff might extend into other funds in the group. A two-day turnaround in oil prices and anticipation that the Fed would pull the trigger to raise its short-term lending rate in December pushed stocks higher in the middle of the flows week, with many investors believing conditions for a Santa Claus rally were beginning to take shape for the latter half of December. On Wednesday, December 16, investors appeared to shrug off reported weakness in November’s industrial production numbers and another slump in oil prices and cheered the decision by the Fed to raise its key interest rate for the first time in almost ten years. Also, the commitment to a gradual pace of increases over the future was seen as an attempt to ease investors’ worries about the change in ultra-low interest rates, which have been attributed by many to be a catalyst for the recent multi-year equity rally. Despite some late-week optimism, investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing a net $39.6 billion for the fund-flows week ended December 16. Investors turned their back on equity funds, fixed income funds, and money market funds, redeeming $13.2 billion, $15.4 billion, and $11.3 billion net, respectively, for the week, but they padded the coffers of municipal bond funds (+$0.3 billion) ahead of tax season. (Keep in mind, however, that year-end distributions can play a factor in the weekly flows calculations, if they fall on a Wednesday, along with the impact of tax selling at year-end. So, some of the big swings we witnessed this past week may be offset next week.) For the tenth week in a row equity ETFs witnessed net inflows, taking in $4.1 billion for the week. Despite initial concerns over the FOMC announcement, authorized participants (APs) were net purchasers of domestic equity ETFs (+$2.8 billion), injecting money into the group for a fifth consecutive week. They also padded – for the fourth week running – the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion). As a result of the wild swings in oil prices and conviction about the Fed interest rate hike during the week, APs turned their attention to some out-of-favor issues, with Energy Select Sector SPDR ETF (NYSEARCA: XLE ) (+$1.3 billion), iShares MSCI EAFE ETF (NYSEARCA: EFA ) (+$1.1 billion), and iShares Core S&P 500 ETF (NYSEARCA: IVV ) (+$0.6 billion) attracting the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (NYSEARCA: SPY ) (-$0.8 billion) experienced the largest net redemptions, while WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) (-$0.5 billion) suffered the second largest redemptions for the week.

Valuation Dashboard: Energy And Materials

Summary Four key fundamental factors are reported across industries in Energy and Basic Materials. They give a valuation status of an industry relative to its historical average. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Energy and Basic Materials. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by Portfolio123 are extracted from the database: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), return on equity (ROE). They are compared with their own historical averages, “Avg.” The difference is named with a prefix “D” before the factor’s name (for example D-P/E for the price/earnings ratio). It is measured in percentage for valuation ratios and in absolute for ROE. The methodology is quite different from the S&P 500 dashboard. In some industries, S&P 500 companies are very few, so mid- and small caps are included here. Also, the fundamental industry factors are not median values, but proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large-cap universe. The drawback is that these factors are not representative of capital-weighted indices. They may be very useful as reference values for picking stocks in an industry, but are less relevant for ETF investors. Industry valuation table on 10/26/2015 The next table reports the four industry factors. For each factor, the next “Avg.” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference between the historical average and the current value, in percentage. So there are three columns relative to P/E, and also three for each ratio. P/E Avg. D- P/E P/S Avg. D- P/S P/FCF Avg. D- P/FCF ROE Avg D-ROE Energy Equipment & Services 21.25 24.2 12.19% 0.81 1.73 53.18% 7.86 35.34 77.76% -10.59 7.34 -17.93 Oil/Gas/Fuel 17.27 18.53 6.80% 1.95 3.35 41.79% 14.22 29.03 51.02% -13.51 4.47 -17.98 Chemicals 20.04 18.48 -8.44% 1.44 1.21 -19.01% 35.4 25.37 -39.53% 9.17 6.74 2.43 Construction Materials 53.65 21.44 -150.23% 1.34 1.16 -15.52% 52 40.5 -28.40% 10.61 5.77 4.84 Packaging 21.91 17.96 -21.99% 0.92 0.61 -50.82% 21.92 20.09 -9.11% 18.58 8.34 10.24 Metals & Mining 20.74 19.83 -4.59% 1.27 2.65 52.08% 15.18 25.53 40.54% -19.81 -8.6 -11.21 Paper & Wood 31.74 21.27 -49.22% 0.77 0.72 -6.94% 21.78 22.81 4.52% 8.41 4.99 3.42 The following charts give an idea of the current valuation status of Energy and Materials industries relative to their historical average. In all cases, the higher the better. Price/Earnings Price/Sales Price/Free Cash Flow Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF in Materials (NYSEARCA: XLB ) and energy (NYSEARCA: XLE ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Since last month, XLB has outperformed SPY by 1%, and XLE has lagged by 3%. Both have been widely underperforming the broad index in the last six months. At the industry level, Energy Equipment & Services, Oil/Fuel/Gas and Metals/Mining look undervalued relative to their historical averages, but they are in negative territory for quality. Oil/Fuel/Gas and Metals/Mining have improved since last month in valuation due to the sharp decline in oil, metal and stock prices. Oil/Fuel/Gas deteriorated in quality, but Metals/Mining is stable. Chemicals, Construction Materials and Packaging are above their historical average in quality, but overpriced for the three valuation factors. Valuation factors have deteriorated for Construction Materials since last month because of a few outliers and the relatively small number of companies in this industry. No industry in these two sectors looks globally very attractive. However, comparing individual fundamental factors to the industry factors provided in the table may help find quality stocks at a reasonable price. A list of stocks in energy and basic materials beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.